Wells Fargo's reputation as a consumer-friendly bank suffered a significant blow Thursday after it agreed to pay $190 million to settle charges that thousands of employees created unauthorized bank and credit card accounts for customers in order to collect bonuses for themselves.

Regulators called the actions of Wells Fargo's employees "outrageous" while analysts referred to as many as 2 million bank and credit card accounts that may not have been authorized as "a black eye" for a company that otherwise has an excellent reputation.

The settlement underscored how incentives and sales goals led employees to illegally open new accounts, transfer customer money to the accounts, and create PIN numbers and emails without customers' authorization, regulators said.

The conduct was not contained to any particular state or region. Thousands of employees engaged in unlawful sales practices, leading Wells to terminate 5,300 employees, equivalent to more than 2% of its workforce, who allegedly engaged in this conduct from 2011 to 2014.

"It is outrageous for a bank to use a customer's private information without their permission to open unwanted accounts," Los Angeles City Attorney Mike Feuer said in a conference call with reporters. "It is outrageous for a bank to transfer funds without consent. Consumers must be able to trust their banks. … This was a widespread, nationwide practice."

Wells said in a statement that it has taken disciplinary actions, including firing managers and team members "who acted counter to our values."

"At Wells Fargo, when we make mistakes, we are open about it, we take responsibility, and we take action," the bank said in a statement.

Yet the bank spent a significant amount of time initially pushing back against the accusations, which first surfaced in a Los Angeles Times article in 2013. Reporter E. Scott Reckard, who has since left the paper, wrote about employees who were terminated because of forced signatures, falsified phone numbers and customer accounts that were opened to meet sales quotas.

"I disagree with the L.A. Times story," Wells Chief Financial Officer Timothy Sloan said in a January 2014 interview with American Banker.

In the original L.A. Times article, Sloan said he was "not aware of any overbearing sales culture."

By Thursday, the bank was no longer denying the claims. Instead, it agreed to pay $100 million to the Consumer Financial Protection Bureau – that agency's largest fine to date – $50 million to the city and county of Los Angeles and $35 million to the Office of the Comptroller of the Currency.

The bank also agreed to pay $5 million in remediation to customers. It already has refunded $2.6 million for fees on products that customers did not request. The average refund was $25.

Wells has long touted its ability to cross-sell products, but some analysts questioned the bank's credibility after the settlement.

"It's a black eye for the company," said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods. "They're doing things that if not illegal, are immoral, signing up people for services they didn't need and charging them fees they shouldn't have incurred. These are fairly egregious acts that seemed to go largely undetected."

Thomas Curry, the comptroller of the currency, called the actions "reckless, unsafe and unsound sales practices."

The "enforcement actions against Wells Fargo likely could have been prevented if the bank had a stronger compliance risk management program that fostered a more healthy culture, in which incentives aligned behaviors properly," Curry said in a statement.

The OCC did not explain how the actions of Wells employees became so pervasive.

Wells' employees opened 1.5 million deposit accounts and 565,000 credit card accounts that may not have been authorized by consumers, according to a review by a third-party consulting firm.

"There is great concern about the culture within the bank being oriented for what is best for consumers and not misaligned," Feuer said. "We had current and former employees express concerns about those pressures."

Under the settlement, the bank has to propose a process for notifying consumers who were affected.

Richard Cordray, the CFPB director, said the settlement reflected the severity of the violations and warned the industry to avoid similar practices.

"If sales targets are implemented in ways that violate consumers then banks and financial companies will be held accountable," Cordray said in a statement.

Wells has made some changes to its incentive system, including reducing sales goals, putting a greater priority on customer service and monitoring the activity at its branches, said Mary Eshet, a Wells spokeswoman. Branch employees receive from 3% to 15% of their salary from incentives, she said. It is unclear how much sales goals contribute to incentive pay for branch and regional managers.

The bank now sends customers a confirming email within an hour of opening any deposit account and an acknowledgement and status letter after receiving a credit card application.

Kleinhanzl said there are tangible benefits to cross-selling products, but the actions of employees did not generate revenues for the bank.

"Cross-selling is something that Wells has prided themselves on, more than any other bank," he said. "Anytime you have a compensation structure that incents some type of behavior, you're bound to have someone that does something to increase compensation."

Marty Mosby, a director of bank and equity strategies at Vining Sparks IBG in Hernando, Miss., said Wells Fargo's cross-sell ratio has slowed in the past year.

"Wells Fargo is learning is that as they become more complex and offer more products, their systems and processes have to be that much tighter, to ensure that the positive culture and focus doesn't turn into something that a few bad seeds can upset the whole process," Mosby said. "Eventually you get to a saturation."

Wells still sells more than six products to each of its customers on average, and the drop in its cross-selling ratio is measured in basis points. But that decline may reflect the topping out of a sales strategy that has been the envy of the banking industry for more than three decades.

The retail banking cross-sell was 6.27 basis points in the second quarter of this year, compared with 6.32 a year ago.

Still, Kleinhanzl cautioned that the actions of employees in signing up customers for unauthorized accounts was not a one-off event, noting that Wells also engaged in high-to-low reordering of transactions to earn overdraft fees.

"It doesn't look good, somebody should have caught it, it reads negative," Kleinhanzl said.

 

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